Minutes after stepping off his private jet in Braunschweig, northern Germany, at the start of this month, Elon Musk climbed behind the wheel of a brand new make-or-break electric car: a Volkswagen ID.3.

The often abrasive Tesla chief managed to summon up some polite, if muted, approval for the vehicle as he drove it up and down the airstrip in the drizzling rain. “For a non-sporty car, it’s pretty good,” Mr Musk ventured to VW chief executive Herbert Diess, who sat in the passenger seat.

If there was a trace of condescension in the words, it was hardly surprising. It is eight years since the launch of Tesla’s Model S set a new standard for electric cars, giving the US company a widely acknowledged lead in the technology. Repeated predictions since then that an onslaught of serious electric competition from traditional carmakers was around the corner have, so far, proven unfounded.

VW’s ID. 3, however, could be a sign that things are changing. It is part of a wave of new vehicles that are finally expected to come closer to matching the efficiency of Tesla’s technology.

Tesla founder Elon Musk’s car designs represent the technological future despite the company’s struggles to break through into stable profits © Chinatopix/AP

All of this has guaranteed maximum attention this week for an event where Mr Musk is expected to reveal the latest advances in Tesla’s battery technology. With customary hyperbole, the master showman of the auto world has promised it will be “one of the most exciting days in Tesla’s history”.

Amid a powerful rally in Tesla’s shares this year, the boasting has been like throwing gasoline on a raging fire, raising the hopes of Tesla bulls and turning “battery day”, as Mr Musk has dubbed it, into a hotly-anticipated moment in the company’s calendar. For his weary critics, on the other hand, it is shaping to be the latest example of Mr Musk promising tech breakthroughs long before they arrive.

“One thing is sure: Elon will announce something big which is nowhere near ready for prime time,” says Bob Lutz, former top executive at America’s three biggest automakers.

Beneath the hype, though, the event could provide important clues about whether Tesla can maintain the technology edge that has made it the auto industry’s most envied — and emulated — innovator.

Tesla revenue and vehicles delivered

No cash concerns

As he prepares for Tuesday’s event, Mr Musk finds himself in a position that would have seemed unlikely as recently as the spring of last year. At the time, speculation about a potential bankruptcy was swirling around the company, which was struggling with production and delivery bottlenecks for its new Model 3.

Analysts point to three crucial changes at the business since then: Tesla is booking profits from the Model 3; the company has finally started hitting production and factory deadlines; and the group’s ability to finance itself is no longer the stock-dragging concern it once was.

“The liquidity question has come off the table, and with the stock price where it is, Tesla going to zero in the medium term is no longer a serious bear case,” says Ben Kallo, a technology analyst at Baird.

Volkswagen’s breakthrough ID. 3 car could be a sign that automakers are catching up with Tesla technology © Krisztian Bocsi/Bloomberg

The coronavirus crisis has added a new twist to Tesla’s rise. The pandemic has hobbled established carmakers as they shut down and then slowly wind back up global manufacturing operations, but Tesla has emerged almost unscathed from the outbreak.

Expectations for electric car sales have also been rising, despite the global disruption. McKinsey increased its forecast for Chinese electric car sales by 300,000 to 3.5m in 2022, up from 1.2m last year. Across the EU and China, electric cars could account for half of all new vehicles sold by 2030, according to the most optimistic scenario from McKinsey.

Column chart of  showing How Tesla turned a profit with the help of regulatory credits

In a stock market awash with cash and hungry for high-growth tech companies, the effects have been combustible. After hitting a low point in March Tesla’s shares soared seven-fold, before falling back by a third this month after hopes that it would be admitted to the S&P 500 index were dashed. But the stock has since recovered most of the lost ground, with the company valued at more than $400bn — nearly as much as the next five most valuable car companies combined.

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Tesla’s sky-high shares, in turn, have handed Mr Musk one of his most powerful weapons. It raised $5bn in a stock sale just as its share price peaked, giving it ample resources to mount its next expansion, including new factories in Germany and Texas.

Tesla’s standard range Model S achieves 3.2 miles per kWh of power, more than most of its competitors © Jasper Juinen/Bloomberg

Efficiency gains

Mr Musk will step into the spotlight on battery day knowing that Tesla still enjoys a solid lead in its core technology over some of the industry’s best-known premium brands.

A spate of new cars that took aim at Tesla’s lead have fizzled badly over the past two years. According to official US figures, Audi’s e-tron and Porsche’s Taycan, two of the most anticipated, manage little more than two miles per kWh of power consumed, a measure of energy efficiency. By comparison, Tesla’s standard range Model S achieves 3.2 miles.

VW and others have developed ground-up battery car platforms, but many early models were simply re-engineered petrol-driven cars that bled efficiency. “One of the things that Tesla has a great advantage in hindsight is being able to start from scratch, and build an electric car up, not trying to make an internal combustion engine car into an electric car,” says Mr Kallo.

But some smaller electric cars are starting to rival the Model 3. Hyundai’s Ioniq, for instance, already matches Tesla’s mass market vehicle in terms of miles driven per kWh, while General Motors’ Bolt is not far behind.

Tesla’s technical edge will inevitably narrow, says Gene Berdichevsky, one of Tesla’s first employees and now head of Sila Nanotechnologies, a battery technology start-up. But even a small advantage could still be significant: batteries account for a large part of an electric car’s cost, and even small improvements could enable Tesla to maintain its current three- to five-year lead, he says.

Line chart of $ per share  showing Changing gear: Tesla stock powers through rocky periods

Mr Musk cannot hope that a disruptive technological leap will allow it to stay ahead. Over the next five to 10 years, Tesla, like others in the industry, can expect only incremental gains in battery efficiency, says Stanley Whittingham, one of three people awarded the Nobel Prize last year for their work on lithium-ion technology. The advances will at best involve “a little bit here, a little bit there”, he says.

When it comes to the materials inside its batteries, one challenge will be to find replacements for cobalt — by far the most expensive component in any battery. Tesla has already cut the cobalt content in its products to around 10-15 per cent, compared with the 20 per cent at other battery companies, according to Mr Whittingham. He also credits the company with making headway in reducing the weight of the heavy graphite anodes that account for half the weight in a battery, replacing some of the material with lighter silicon.

Alongside such piecemeal gains, Tesla been taking steps to adapt its battery technology to different markets. Three months ago, for instance, it was reported to have obtained approval in China to use a new lithium-iron phosphate battery. The material is expected to be more durable and cheaper than batteries used elsewhere, though with less range. This could allow Mr Musk this week to claim the industry’s first “million-mile” battery, capable of many more charge and discharge cycles than typical car batteries.

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While the chemistry inside the batteries has become a key factor in improving performance, most experts expect most of the focus at this week’s event to be on other factors that affect battery performance and vehicle range.

The Cruise Origin electric driverless shuttle at a launch event in San Francisco in January © David Paul Morris/Bloomberg

The software that manages the company’s battery packs, for instance, along with the electronics used to control its electric Drivetrain, are technologies in which Tesla has had a well-earned reputation for being ahead of its rivals, says Sam Abuelsamid, a transport analyst at Guidehouse.

The company “invested massively through the years” in every aspect of its electric system to achieve its efficiency gains, says JB Straubel, who worked at Tesla for 16 years before stepping down as chief technical officer last year. “It was under appreciated how difficult some of those challenges were, how much engineering had to go into all those small aspects.”

Musk took the VW ID. 3 for a quick spin this month in Germany. He described it as ‘pretty good’ for a non-sports car © VW

Tesla executives have hinted heavily that the company will also start to design and make its own battery cells — the basic components that are assembled into large packs that power its cars. By producing cells itself, rather than buying them from its battery partner Panasonic, it could design them to fit more seamlessly with its packs, bringing another small gain in efficiency, says Mr Berdichevsky.

Such a move, he adds, would be in keeping with a tech strategy that has already seen it take on far deeper vertical integration than other carmakers.

This, according to many people who have worked at the company, has been its biggest advantage. Peter Rawlinson, a former chief engineer at Tesla, says that designing all its own components meant that the company had been able to enhance the efficiency of its motors and manage the power flowing from its batteries to its motors and into the regenerative braking system. Tesla’s mastery of all this has made it the “king” of battery efficiency, measured by the miles its vehicles can travel per kWh, he says.

Hyundai’s Ioniq already matches Tesla’s mass market vehicle in terms of range © Jung Yeon-Je/AFP/Getty

“Even Porsche does not develop its core technology in-house, that is the differentiator, that is why Tesla is the most valuable car company on the planet,” says Mr Rawlinson. As the chief executive of Lucid Motors, a US electric car start-up backed by Saudi Arabia’s sovereign wealth fund, he now heads one of a number of companies that are racing to copy Tesla’s tech advantages.

The company’s fans say this vertical integration brings other advantages. For instance, by either making many of its own components, or designing them and outsourcing the manufacturing, it is able to integrate all the software controls that manage the hardware and the charging of its batteries, says Gene Munster at venture capital firm Loup Ventures.

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The result is a single software platform controlling the entire vehicle. Tesla’s over-the-air software updates were one of the first demonstrations of how cars were more like smartphones. According to optimists such as Mr Munster, this will be one of the things that rival carmakers, which mainly act as integrators bringing together components and modules made by suppliers, will find the hardest to match. It will also be difficult for them to replicate the kind of software culture Tesla and other start-ups have developed, he adds.

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Others, though, argue that the rest of the industry has already learnt some of Tesla’s software tricks — while even leapfrogging it in some places. Mr Lutz lists recent advances by GM, including an innovative way of controlling its latest battery pack wirelessly; over-the-air updates for its vehicles that already work smoothly; and driver-assistance software at its upmarket Cadillac brand that is as advanced as anything else on the road.

​Tesla executives have hinted heavily that the company will also start to design and make its own battery cells​ © Rich Pedroncelli/AP

Where are the robotaxis?

It is in fully autonomous driving where Mr Musk may be facing his biggest technological challenge. He has claimed for years that Tesla is on the brink of achieving this breakthrough. He has also said that at that point, Tesla owners will be able to unleash their updated vehicles on to the roads to become part of a giant fleet of robotaxis.

The technology, however, has not lived up to the promise. “It’s been all hype and very little reality in terms of automated driving,” says Mr Abuelsamid at Guidehouse, which puts the company near the bottom in its ranking of automakers judged on this technology. Even Mr Munster, who argues that there are good reasons for Tesla’s shares to keep rising, concedes that Mr Musk has “over promised” with his repeated claims that Tesla is close to unleashing robotaxis on the roads.

Consumer Reports reached a damning conclusion after testing Tesla’s automated features earlier this month: “Though it has made significant strides in automated driving, owners should not rely on Tesla’s driver assistance features to necessarily add safety or to make driving easier.”

The consumer research group said most aspects of the technology work only “inconsistently”: the auto-park feature sometimes fails to identify parking places; summoning a car in a parking lot sometimes results in it driving down the wrong lanes; and an automated navigation system occasionally ignores highway exits the car needs to take.

Yet Mr Musk’s ability to convince customers that the technology is worth paying for has become an important part of Tesla’s pursuit of sustained profitability. All of its vehicles come with the hardware necessary to run what it calls Autopilot. As a result, if the company can persuade them to pay the extra $8,000 for the most advanced form of the software, almost all of the money falls to the bottom line.

The sales pitch has worked. In July, Tesla reported its fourth profitable quarter in a row for the first time — something that puts Mr Musk in line to receive a stock bonus worth about $3bn. It has only made it into the black in the past two quarters thanks to sales of regulatory credits to other car companies to cover their lack of electric vehicle sales. However, that is a source of revenue that Tesla has admitted it cannot rely on in the long term.

Despite the company’s struggles to break through into sustained profitability from making and selling cars, Wall Street still believes its cars represent the technological future. Now, with battery day, Mr Musk hopes to give the Tesla faithful one more reason to believe.

Additional reporting by Patrick McGee

Via Financial Times